Property Assessed Clean Energy (PACE) financing lets homeowners fund energy upgrades through a special tax assessment repaid with property taxes. The problem: PACE liens attach to the property and in most states carry super-lien priority ahead of the first mortgage, making them a direct threat to lender collateral.
Why Fannie Mae, Freddie Mac, and FHA Reject PACE
Fannie Mae Selling Guide B5-3.4-01 prohibits delivering loans secured by properties with outstanding PACE obligations unless the PACE lien is subordinated in a form acceptable to Fannie. In practice, most PACE programs do not agree to subordination. Freddie Mac and FHA/VA/USDA take the same position. If a borrower has an active PACE obligation, the property is not eligible for agency financing without payoff.
How to Identify a PACE Lien at Application
- ✦Order title early -- PACE assessments appear in property tax records, not always on a standard title search
- ✦Ask the borrower directly: any energy improvement loans on solar, HVAC, windows, or roofing in the last 5 years
- ✦Check the property tax bill for line items named HERO, Ygrene, Renovate America, or Benji
- ✦CA, FL, and MO have the highest PACE penetration -- apply extra scrutiny in those states
Options When a PACE Lien Exists
Payoff at closing is the cleanest resolution. The PACE balance is paid from proceeds or by the seller. Confirm the payoff demand includes all accrued assessments through the closing date. If payoff is not feasible, the deal cannot close with agency financing. Some portfolio lenders accept a subordinated PACE lien with a modified title policy, but that requires prior lender approval before you submit the file.
Aria can confirm current PACE lien eligibility requirements by agency and flag state-specific rules for CA, FL, and MO. Ask at vicariointel.com.
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